Should You Bother Reading Annual Reports?

Every company that is publicly traded is required to report financial results, which includes an annual report at the end of each fiscal year. These tend to be long documents full of numbers and sunny messages from the management team. As a shareholder or potential investor, should you bother reading annual reports? What does an annual report contain? Annual reports include financial summaries, including year-end income statements and balance sheets. There tend to be pages and pages of financial information. You don’t need to read all of it, but it can be helpful to go over certain numbers. What are…

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Every company that is publicly traded is required to report financial results, which includes an annual report at the end of each fiscal year. These tend to be long documents full of numbers and sunny messages from the management team. As a shareholder or potential investor, should you bother reading annual reports?

What does an annual report contain?

Annual reports include financial summaries, including year-end income statements and balance sheets. There tend to be pages and pages of financial information. You don’t need to read all of it, but it can be helpful to go over certain numbers. What are final revenue numbers? And, just as importantly, how does this revenue compare to previous years? What do profits (earnings) look like? How much debt is the company carrying, and has this number changed significantly in the last year?

These are all important numbers. You can sift through the document to find them, but they are often included in a highlight section at the beginning of a report.

Let’s take Toronto-Dominion Bank (TSX:TD)(NYSE:TD) as an example. Its 2016 annual report starts with a “2016 snapshot.” Here, TD reports both reported and adjusted net income, earnings per share, total assets, and dividends per share, among other numbers. All of these figures increased from previous years, meaning the company is maintaining an upward trajectory. For example, diluted earnings per share were $4.67 — up from $4.22 in 2015. The report then moves into a “year at a glance” section, which talks about highlights from 2016. This, of course, only includes the best information the bank has to report.

Annual reports usually contain messages from the CEO and management team. (The TD annual report includes a message from CEO Bharat Masrani.) CEO messages from any company are always glowing, even when a company isn’t doing so well. If an entire company was destroyed in a natural disaster, the CEO message would likely proclaim something along the lines of “there’s so much room for growth!” So, take the CEO message with a huge grain of salt.

Where these various messages are helpful is in outlining the company’s goals for the next year. You will see if a company has lofty plans (that may involve a lot of risk) or if a company is happy with the status quo.

After these sections come the financial reports, which you can delve into if you’re the type of person who gets giddy about numbers. If not, you can stick with the summaries at the beginning of the report.

Where can you find annual reports?

If you (begrudgingly) agree that annual reports contain some useful information that you should know, where can you find this information? You can start with the company website or simply typing “(company name) annual report” into a search engine. You can also search www.sedar.com. Sedar is the System for Electronic Document Analysis and Retrieval. In Canada, all publicly traded companies are required to provide their financial information to provincial securities regulators, and this information will end up on the Sedar site.

Investor takeaway

As an investor, you will see a lot of news and information about any company you want to invest in. While it’s easy to become overwhelmed with all of the data, it’s helpful to at least peruse the highlights of a company’s annual report. The more you know, the better investment decisions you will make.

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Fool contributor Susan Portelance has no position in any stocks mentioned.

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